The A, B, Cs Of Payments 2015

Well, here we are – just a few short weeks before 2015 is one for the history books. What a year it’s been.

In many ways, 2015 was the year in which everything – and nothing — about payments changed. Plastic cards, checks – and yes, even cash – still define how payments are made among people and businesses. This is despite the billions of dollars and manhours dedicated to launching a seemingly endless array of new innovations intended to change that.

That’s why 2015 might be one of the most important years in payments and commerce history yet. It was a year in which important lessons were learned about what the future of payments might look like, where we got a better sense of what real problems need to be solved and for whom, what enabling technologies might help us do that, and who might lead the way.

This year may not have made the big dent in the payments universe that many thought we’d see when the year started. But, more so than many, 2015 will go down in the history books as a turning point nonetheless. It’s likely that the year’s hits and its misses will translate into crucial pivots that will define the year to come.

So let’s take a look at the year that is 25 days from ending but a bit differently.

I thought it would be interesting to highlight the big topics of conversation in payments and commerce. Turns out that there’s one for every letter of the alphabet.

This is the first installment of the 26 things that help us better understand the hits, the misses and the too early to tell events that defined Payments 2015. I’ll give you my take on why each is important.

We’re going start today with A-K. To tease you just a little bit, A is for Apple Pay and K is for Kool-Aid. There’s a whole lot of juicy stuff in between.

Tomorrow we will do L through S. I can already tell you that S does not stand for Security, but M does stand for Mobile.

Wednesday, we will wrap things up. T is for Tokenization and W is for Wearables. Z you’ll just have to wait for.

Then, a week from today, I’ll synthesize those 26 into the 5 Really Big Things that will underpin Payments 2016 – and, hopefully, your strategies and plans.

So, drumroll please, as we reveal the first part of the Payments Alphabet 2015:

THE A,B,Cs OF PAYMENTS 2015

Apple Pay

Not since, well, ever has there been such fanfare around the launch of a new payments scheme. Apple’s Tim Cook proclaimed 2015 the “Year of Apple Pay” when it launched in the Fall of 2014. And ever since, the industry pundits and the media basically have called it “game over” for everyone else.

Yet a year later, the vast, vast, vast, vast majority of the early adopters of the new iPhones, and now the mainstream Apple iPhone 6/6S users, haven’t taken the bait. And the shine has come off the apple, so to speak.

Only 5 percent of all transactions that could be done via Apple Pay – consumers with 6/6S handsets and merchants with NFC-enabled terminals – are done that way, which makes the overall percentage of retail sales via Apple Pay something less than a freckle on a pimple on a gnat’s eyelid. We estimate it around .002 percent — we’re not saying that’s a precise estimate by any means, only that everything points to overall usage being miniscule.

But there are important lessons to be learned here.

No. 1 lesson: payments is hard. And it’s hard for everyone, even if you happen to be the biggest and most beloved tech company in the world.

But Apple made something that is hard to begin with even harder for themselves. Apple came into the market forcing constraints on all sides of its platform given the technology horse that they chose to ride. Apple’s decision to embrace NFC meant that consumers had to have special hardware, so did merchants and few merchants did (and still do). Banks had to agree to give up money to play along – which they did then but which will make additional asks from Apple even tougher. And, of course, consumers had to buy the phone, which millions did, but few (like 3 percent) did because of Apple Pay. Its global expansion strategy is pegged to American Express cards, which limits the market even further.

That means that Apple’s strategy puts it at the mercy of both consumers and merchants to upgrade their gear. Consumers have to be convinced that using their phone to tap at a terminal is better than swiping a card — but doing that at far, far fewer places than they do now.

And all of this has to happen before enough consumers fall in love with something else that solves a bigger problem for them instead of creating one and before merchants then prioritize around that something else. Dollars aren’t the only currency in payments — time can be as crucial.

Apple Pay is perhaps the most visible and interesting lesson in platform ignition we’ve had in payments for a very long time.

Bitcoin

Puhlease, can we all just agree to stick a fork in bitcoin? I am pretty sure that no one at this point is a bitcoin-as-global-currency-supporter – and for that PYMNTS will unabashedly take some credit given our rather stark assessment of its chances at doing that a few years ago. No sensible person could ever advocate the need for a currency that takes fiscal policy and control out of the hands of a central government.

But if we kill bitcoin that means we will also kill and bury the blockchain since bitcoin is what keeps the blockchain alive.

Bitcoin is the method of transport used by the blockchain to move data between the miners. That’s how they are paid. That’s sort of the dirty little secret that blockchain advocates don’t talk much about.

And keeping bitcoin alive is a bad thing. It’s a global currency alright, one used today around the world – by cybercriminals to finance their activities on the dark Web. Want to buy stolen credit card credentials? Easy peasy. Get a whole big pile of them and pay using bitcoin. And just about everything else that’s unsavory that bitcoin now makes easier to pay for – and procure online.

Distributed ledgers, on the other hand, could have some potential — think of them as blockchain without the bitcoin. Many are also bank friendly, many of them leveraging existing banking infrastructure, their well-developed risk, compliance and regulatory expertise and APIs to innovate the movement of money between these distributed ledgers around the world.

FIs don’t have to give up on innovating how money moves around the world, they should just give up on doing it via the blockchain.

And if regulators are looking for something to add to their agenda in 2016, maybe regulating bitcoin out of existence could be top of their list. So far, bitcoin has been really good at doing two things: one good and one very bad. It’s opened up a whole new narrative around how we should be thinking about innovating the movement of money around the world. That’s good.

It’s also removed the friction from buying illegal goods and procuring illegal services online and ignited that market. And that’s really bad, especially now.

Cross-Border

Have mobile phone, will travel – via the Internet to any online merchant. Mobile devices provide an opportunity for merchants to scoop up incremental sales from consumers who can now use those devices to find them and do business with them.

And, there are more than 1.2 billion consumers online and ready to do some serious shopping.

Yet, for all of its potential, so far cross-border is retail’s biggest fail. If anything, it’s getting worse. Our latest Cross-Border Payments Optimization Index shows that merchants have taken a few steps backwards – just as consumers with mobile devices are taking many giant leaps forward.

But doing cross-border well can be complicated – currency, language, payments method, taxes and shipping all have to be localized. The best of the best know that being a global merchant means solving for both payments and logistics pain points — and doing it from the perspective of the shopper in their home country.

We’ve seen, shockingly, that some merchants have actually opted to “get out of” cross-border entirely by deliberately making it impossible for consumers to ship anywhere but within the merchant’s domestic market. The tradeoff that they are making is turning those consumers away rather than deliver a bad customer experience.

Either way, they are missing out on perhaps the most clearcut way of adding incremental revenue to their bottom lines, since on the Internet, everyone knows you’re a merchant.

Data

Data is the coolest kid at the payments party in 2015. And data scientists are the Big Men And Women On Payments’ Campus. And, transaction data its most coveted prize given its potential to give everyone concrete clues on how consumers are actually behaving at the point of sale.

But as commerce becomes more distributed and data sources more extensive, data is being used by many different players across the ecosystem to create entirely new products and business models.

I listened last week to an Under Armour executive describe how access to data from the sensors in their clothing has driven a fundamental shift in their business. The data that Under Armour captures, with the consumer’s consent, helps Under Armour make better products, but it also helps them and others serve those athletes better, too. For instance, getting information on what high-performance athletes eat before a race not only offers useful information to other athletes but a potentially new source of revenue for Under Armour when information and promotions about those food products are marketed to them.

Data has become such an important part of its business that Under Armour doesn’t think of themselves as just a clothing manufacturer anymore. They think of themselves as technology company that has created and now runs the largest connected fitness network in the world.

Data has always been important to payments – but in 2015 we saw the beginnings of how it will evolve to create new adjacent revenue streams for companies across the ecosystem in the years to come.

EMV

2015 might not have been the Year of Apple Pay, but it was the year of EMV for the U.S. With the move to chip and signature in the U.S., the world is finally standardized on EMV at the physical point of sale, ushering in a variety of digital standards based on the EMV spec, like payments tokens.

While no one can argue the merits of standardized protocols for transacting – after all, that’s what the mag stripe is, too – and doing it under the rubric of a more secure experience — the deployment of EMV and the timing of said deployment was not without its controversy.

The liability shift timeline was aggressive, and the result is that the vast majority of terminals still are not EMV ready and far fewer consumers have chip cards in their wallets. Merchants, even with EMV terminals on their counters, don’t have them activated. I’ve been to big merchants – CVS, Walgreens (in San Fran), Whole Foods – and they tell me (when I swipe by mistake) that they won’t be turned on for a while.

Meantime, back at the SMB ranch, according to the newly released SMB Technology Adoption Index we did with Sage, 64 percent of them have no plans to introduce EMV ever. Some categories like restaurants think they’ll skip it all together given the friction it will introduce into their service process. Now, that’s not to say that they are blasé about fraud and security since of course they want to avoid being hacked, but most SMBs think they’re too small to be a target. Others are exploring tokenization and P2PE to keep data protected.

Yet, what EMV has done is to open up useful and important conversations about consumer authentication – the problem that EMV originally set out to solve more than two decades ago. And how to do that online, offline and in a world that will move commerce to any end point with a connected device. The digital identity of a consumer – securing it, protecting it and making it interoperable across channels was a key topic of conversation in 2015 – and it will be a center point in 2016 as well.

Frictionless

Ah, yes, the biggest “f” word in payments.

2015 will go down as the year in which “frictionless” was simultaneously the most overused yet least defined/understood word in payments.

Frictionless was in every pitch deck, every marketing brochure, and peppered within every conversation by every innovator when describing their solution. But “frictionless,” like the blind man and the elephant, became a matter of context.

To deliver a frictionless, one must first assess the points of friction. Is friction caused by the number of steps to checkout online? By the fact that businesses still pay each other with checks? By the fact that most retailers still make customers pay for shipping? That one-click checkout is still elusive on many sites? That, even with a mobile phone, consumers still have to walk up to a counter to pay – and sign? That we still can’t clear and settle a check the same day? Making the consumer authenticate themselves multiple times during the course of a transaction? Because having a bank account is too expensive so some people opt out of traditional banking?

So, Step 1 in paying off a frictionless value prop means first identifying what gets in the way of an efficient payments transaction, how much that friction costs a merchant or a business and then the ROI on truly become frictionless.

And we’re starting to get a sense of that in a few key areas.

The Checkout Conversion Index, something we did in collaboration with BlueSnap, reveals that friction online costs merchants 36 percent of their online sales. SMBs tell us that that being paid on time is their No. 1 priority, yet most of them say that checks used to pay them introduces about an 18-day lag between the time that the check comes into their office and the money shows up in their account.

In both situations, billions upon billions of dollars slip through the cracks — needlessly.

As they say, with knowledge comes power. And as we chip away at defining friction and its real impact on the payments ecosystem, 2016 could shape up to be the year that merchants and businesses start to use that knowledge to truly become frictionless.

Gas Stations

Gas stations are a proxy for a future where every device is a commerce device – including one’s car.

MasterCard and Visa and SAP and Chase Pay and Samsung Pay, Verifone, and P97 have all independently (and in some cases collectively) announced initiatives that take the first steps into turning cars into enabling commerce platforms. Sensors linked to apps detect when a car is running low on gas, then help consumers find the nearest gas station with the cheapest gas, activate the pump when the car pulls up to it, and then charges the purchase to the consumer’s card on file. Offers are served to entice those consumers into buying (high margin) items in the convenience store attached to that gas station or to avail themselves of other value added services like car washes.

This same connected car can also alert a store in a mall that a consumer is pulling into the parking lot so that offers from her favorite store can be teed up — as can sales associates to greet that VIP shopper in a store. She can even be directed to open parking spots, and have parking fees, if there are any, automatically charged to her card on file.

All of this is done via apps on a smartphone, connected via software to the cloud and chips or sensors in cars. Gas stations are among the first to explore this new connected commerce reality given the costly swap out of card technology to enable EMV payments at the pump.

This is just one tangible example of how connected or distributed commerce can – and will — leapfrog the existing point of sale experience and reinvent it and the roles of the players within it. Amazon’s Dash Buttons and Echo ecosystem is another. And as I heard someone say last week, this stuff isn’t science fiction anymore, it’s science fact.

Habits

One of the best business books I ever read was “The Power of Habit.” Written by Innovation Project 2014 speaker Charles Duhigg, the book is, quite literally, an overview of how a consumer’s muscle memory is formed and why habits are so hard to unlearn.

The “habit loop” that Duhigg describes — cue, routine, reward — is both the how and the why people do what they do. In retail payments, the cue is a consumer being in a store and walking up the counter to checkout. In commercial payments, it’s having to pay someone (or be paid). The routine is whipping out a card (consumer) or writing a check (business) and the reward is walking out with a purchase (retail) and having a happy supplier (business).

If 2015 taught us anything, it taught us that the payments habits of consumers and businesses are incredibly hard to break.

On the retail payments side, the habit loop is hard to break because plastic cards work well and everywhere – and mobile payments don’t yet. On the commercial payments side and for SMBs, the habit loop rationale is similar — cash and checks work really well too, despite the plethora of electronic options available for the AP departments to pick from. In both situations, the big incumbent competitor is the status quo which – today at least — delivers the value and utility that consumers and SMBs seek. And that simply swapping out one form factor or payments method for another isn’t going to sweep those consumers or SMBs into the arms of payments innovation.

One way that it might is to play into another engrained habit that consumers have: buying online. Clicking “pay” or “buy” online is a habit that consumers have honed for two decades and are doing more frequently on mobile devices. We’re starting to see clever innovators on both the retail and commerce side of payments play to this muscle memory and use it to enable payments. “Checking out” in physical stores the same way consumers do online – or having buyers pay their suppliers the same way they buy from Amazon – could turn out to be a far easier habit to extend into the innovative payments environments of both businesses and consumers.

Invisible

It’s inevitable. Mobile and digital is adding layers between the consumer and the merchant and/or the business and the payments brands that complete the transaction. The payments brands that are front and center in a plastic world – networks and issuers – are no longer what consumers necessarily see first and associate with.

That makes banks particularly nervous.

And at the same point in time that consumers are being presented with a number of new digital banking options and the many “Pay” players, including PayPal, are positioning themselves to become the “the wallet” for payment in a digital world.

But being invisible doesn’t mean being irrelevant and that’s the mistaken conclusion that drove bank mobile payments strategies in 2015.

If banks deliver great products and tremendous service, banks will still win the customer and their business since those will be the products that consumers will attach to the variety of digital “wallets” and accounts that they establish.

It’s a losing proposition for all but a small number of banks to think that they will rise to the level of becoming a “buy button” on a merchant site. But that isn’t what will win the day for them in a mobile world. Instead, banks can remain a viable and relevant option for consumers if they make their product one that the consumer can’t live without. In 2015, banks spent the better part of the year stressing over being invisible. In 2016, they should, instead, stress about how to keep from being irrelevant.

JPMorgan Chase

JPMC is one of those few banks that has the potential to become a powerful force in mobile payments. With the announcement of Chase Pay in October, Chase finally showed the world its digital strategy – which is to become a new closed loop network that offers favorable economics to merchants, acceptance to its 93 million consumers via a Chase Pay buy button, auto-provisioning into a mobile wallet and data that can help deliver relevant offers and incentives to grease their ignition flywheel as it scales. Chase Pay eschewed NFC in favor of an app powered by a QR code read by scanners that most merchants have already in their stores.

The devil is in the details, of course, and Chase has set the expectations bar very high. By mid-year, it is supposed to be in market with 100K merchant locations turned on. As we’ve seen with every other big announcement like this, execution of anything in the merchant environment is harder than it sounds. Getting 100K merchants lighted up, even if Chase can leverage its acquiring arm, is ambitious. And, getting consumers to try it – and stick with it – will require a strategy that changes the cue-routine-reward habit loop that has kept so many other schemes from getting traction.

But for sure, Chase Pay will be the one to watch in 2016 for many reasons. Chase has to decide how much (and nicely) it wants to play with others now that it has declared its ambitions to be a new payments network. Will Chase still play nicely in the Apple Pay sandbox, especially given the P2P rumors swirling around Apple Pay’s next mobile payments moves? With PayPal? My guess is that Chase will most likely let the consumer decide how and where to use their Chase cards, and work like crazy to get them to use them to establish preference for their Chase Pay products.

How the networks will play with Chase will now be fascinating to watch too. Chase is no longer just an issuer of Visa-branded cards, they are an issuer that will operate a closed loop network that runs over Visa Net. That makes them more like Amex or Discover. And networks typically compete more than they collaborate. 2016 will be totally consumed by getting Chase Pay off the ground but it could also offer some clues as to how this new network normal might play out over time.

Kool-Aid

There was a lot of that being served around the FinTech world in 2015. With access to capital at an all-time high, millions upon millions of dollars were being thrown to innovators with a clever idea designed to change the world. More unicorns were inducted into the unicorn FinTech club in 2015 than in any other year – so many, in fact, that a company throwing off revenue and a market cap of $300 million or $400 million was something that innovators felt that they had to apologize for.

And in 2015, the great puzzle was the rhyme or reason to the multibillion dollar valuations of those unicorns. It certainly wasn’t the revenue numbers that belied them.

Five-year-old Stripe at a $6 billion valuation and no disclosed revenue numbers – clocks in at $3 billion less than the valuation of Vantiv, which processes 15 billion transactions a year and $1.5 billion less than WorldPay that processes ~3 billion transactions a year. It’s about a third of First Data which processes 42 percent of all merchant transactions in the U.S. Maybe it puts Stripe in a situation that many “unicorns” face when they hit the public markets: a valuation that’s hard to support and sustain given the reality of their business and the highly competitive arena in which they operate. Then again, maybe more Kool-Aid will be drunk and it won’t matter much.

But perhaps what punctuated the pervasive passing of the Kool-Aid in 2015 is the story of Theranos – and its 10-year, $9 billion or $10 billion market cap, without anyone ever challenging the merits of its scientific claims. Its Silicon Valley pedigree, high-profile board members and founder mystique was enough to sustain the calls for hundreds of millions of dollars in capital raises, drive partnership deals with big named retailers and fuel the ongoing media hype over a 10- year period. Only now are the questions that should have been asked and answered years ago, starting to surface.

In 2015, we saw the risks and even the dangers of groupthink. Critics say that the only people who are being hurt are the private investors who are playing with their own money. That’s not necessarily true. Companies spend time and money courting partnerships with unicorns so that they aren’t left out, at the expense of other things that they could be doing with companies that are “better” but don’t belong to the unicorn club. With the experience of Square in our rearview mirror, the instructive lessons taken from Theranos, the lack of ROI in bitcoin investments, and the rumors of the tech bubble softening, maybe 2016 will be the year that we spend less time propping up unicorns and more time celebrating the workhorses of payments and commerce that have the prospect of moving our industry forward.

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